Credit Building vs. Credit Repair: What You Need to Know

credit building

By Ben Luthi

If your credit isn’t quite where you want it to be, you might be looking for opportunities to raise your credit score.

Credit repair may be able to help you achieve your goal, but it’s important to know that credit repair and credit building aren’t necessarily the same thing, and there are several things credit repair companies cannot do for you.

Here’s what to know about the differences and how to ensure you make the right moves to improve your credit.

What is credit repair?

Credit repair is the process of improving poor credit by getting inaccurate, unfair, or unverified information removed from your credit reports.

This information often shows up on your credit reports due to a mistake by or miscommunication with a creditor, or through a mistake made by the credit reporting agencies. Alternatively, you may find negative tradelines that are a product of identity theft. Either way, it can affect your credit negatively.

Credit repair organizations provide services that can help you get these items removed from your credit report by working with the credit reporting agencies and the creditor. However, they typically charge a fee for the service, which can depend on where you live, the company and which services you need.

If you want to avoid a paid credit repair service, you can address the problem accounts yourself by disputing them with the credit reporting agencies and the creditor. However, if the tradeline is complicated or you don’t have a lot of time to focus on it, a paid service can help.

“They’re subject-matter experts and know how to navigate the entire process. This means they often get results faster than you can on your own,” says Mike Pearson, founder of Credit Takeoff.

If you don’t have any items on your credit report that are inaccurate, unfair or unverified, credit repair services won’t be able to help you raise your credit score.

What to watch out for with credit repair services

Reputable credit repair companies can help you take steps to get some negative information removed from your credit reports. It’s not a guarantee, though.

“Credit repair is not a cure-all or a magic wand that can automatically make all your credit issues disappear. The truth is that everyone’s credit situation is unique and that there are no guaranteed results, even with a paid service,” says Pearson.

In some situations, for example, it can be difficult to prove that an account is listed incorrectly or unfairly. So you may end up paying for a service without seeing any results.

Also, watch out for red flags that a credit repair service may not be legitimate. If you see an ad promising that the service can help you improve your credit score immediately or by a certain amount, it could be a scam.

Credit repair scams also do things like pressuring you to pay upfront fees, avoiding explaining your rights to you, or telling you not to contact the credit reporting agencies directly.

What is credit building?

Credit building is essentially any activity that can help build good credit. While credit repair goes back and removes negative items from your credit history, credit building focuses on adding new, positive information to your credit report instead.

Keep in mind though, when it comes to credit, there aren’t any quick fixes. Both rebuilding your credit and repairing credit can take time.

In general, the process of building credit begins with finding out where you stand. Start by getting access to your credit score, which you can do through a free service like Credit Karma or Credit Sesame.

Also, get a copy of your credit report from one or more of the major credit reporting agencies. You can get a free copy every 12 months from Experian, Equifax, and TransUnion through AnnualCreditReport.com.

Once you have the information you need, look at the information on your credit report to spot areas where you can improve. Specifically, focus on the factors that affect your FICO credit score, which include:

  • Payment history
  • Amounts owed
  • Length of credit history
  • New credit
  • Credit mix

Payment history

35% of your FICO score is based on your payment history, making it the most important factor. If your credit score has dropped because of some late payments or collection accounts, work to get those accounts current as quickly as possible and make your monthly payments on time.

While that won’t get rid of the negative information on your credit report, making your payments on time and in full each month can stop the bleeding and help you establish a positive payment history going forward.

Amounts owed

This factor makes up 30% of your FICO score and is primarily driven by your credit card utilization rate. This rate is calculated by dividing a credit card’s balance by its credit limit. So if you have a card with a $2,000 balance and a $10,000 limit, its utilization rate is 20%.

Many credit experts recommend keeping your utilization rate below 30%, but there’s no hard-and-fast rule with the FICO score. Instead, the lower the rate is, the better.

If you have high credit card balances, work on paying them down as quickly as possible. If you think it will take you a while to get there, consolidating them with a personal loan could help by shifting the debt to a credit type that doesn’t factor into your credit card utilization rate.

Each month that your utilization rate decreases, your credit score will respond accordingly.

Length of credit history

15% of your FICO score is attributed to the length of your credit history, both in terms of how long you’ve been using credit overall and the average age of your accounts.

With the first half of that equation, the only thing you can do is to be patient. As you continue to use credit over time, its overall length will increase. With the second, the best thing you can do to increase your average age of accounts is to avoid opening new credit cards unnecessarily.

New credit

Almost every time you apply for a credit account, the creditor does a hard inquiry on your credit report, which can knock a few points off your credit score. If you apply for a lot of credit accounts in a short period, though, the effect on your score can be compounded. In total, new credit accounts for 10% of your FICO credit score.

As with the average age of your credit accounts, the best thing you can do for this factor is to avoid applying for credit unless it’s necessary. And if you’re applying for a mortgage or auto loan, try to do your rate shopping within a period of 14 to 45 days. That way, all of your inquiries will be consolidated into just one on your credit report.

Credit mix

This final factor also makes up 10% of your FICO score and is based on the types of credit you have. In general, it’s better to have a good credit mix, including credit cards, mortgage and auto loans, student loans and more.

However, FICO has stated that your credit mix doesn’t have a lot of influence unless you have a thin credit profile without much other information to use to create a credit score.

Once you’ve identified the areas of your credit you need to work on, you can take steps (or find the right financial products) to help you build credit and work towards your credit score goals. These could include getting a credit builder loan, a secured credit card or retail store card, or other options. Just make sure you only get credit building products you can manage responsibly.

How to use credit repair and credit building together

Depending on the situation, you could use either credit repair, credit building, or a combination of the two to improve your credit score. As you look through your credit report, keep an eye out for any accounts you don’t recognize, keeping in mind that some creditors may use a different name on your credit report than they do publicly. When in doubt, ask your lender first.

Also, look for information that’s inaccurate, unfair or unverified. If you find something, consider addressing it yourself first through the credit bureau dispute process and by contacting the creditor. If it gets too complex or you don’t have the time to focus on it, consider enlisting the help of a reputable credit repair company.

Once you or the credit repair service submits a dispute, the credit bureaus have 45 days to respond to it. Depending on the situation, though, you may need to communicate back and forth between the credit reporting agency and the creditor, which means the process can take a few months to complete.

Don’t just focus on credit repair, though, says Pearson.

“Credit repair can act like a Band-Aid because it addresses the surface level bleeding but doesn’t heal the wound,” he adds. “If you have trouble with spending and debt, credit repair will not help with those root issues.”

If you decide to work through the credit repair process, be sure to address the underlying issues that led you to needing credit repair in the first place. Otherwise, you could end up back in the same boat later on.

To do this, take a hard look at your financial habits, credit use and spending behaviors and look for other ways you can improve your credit and prevent problems in the future. Start building credit rather than just repairing it.

Depending on what you’re working on, you may see some improvements with credit repair within a month or two. With other actions, however, it can take several months to start seeing meaningful change.

The bottom line

If you have both legitimate and inaccurate information on your credit report, credit repair and other credit building efforts can work hand in hand to get your bad credit back on the right track. However, it’s important to understand the limits of each, as well as the costs and how long it takes until you’ll start to see signs of improvement.

As you look for ways to rebuild your credit, it’s important to consider all of your options to find the path that works best for you.

About the author

Ben Luthi is a personal finance writer who has a degree in finance and was previously a staff writer for NerdWallet and Student Loan Hero.

Written on May 8, 2019

Self is a venture-backed startup that helps people build credit and savings. Comments? Questions? Send us a note at hello@self.inc.

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